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Lectures in Microeconomics-Charles W. Upton
A Competitive Industry
A Competitive Industry
A Competitive Industry
• The General Rules
– Produce widgets until MC = P.– If I cannot cover VC, shut down immediately– If I cannot cover my VC + FC, start shedding
my fixed costs. Then shut down.
A Competitive Industry
A Competitive Industry
• The General Rules– Produce widgets until MC = P.
– If I cannot cover VC, shut down immediately
– If I cannot cover my VC + FC, start shedding my fixed costs. Then shut down.
A Competitive Industry
A Competitive Industry
• The General Rules– Produce widgets until MC = P.– If I cannot cover VC, shut down immediately
– If I cannot cover my VC + FC, start shedding my fixed costs. Then shut down.
A Competitive Industry
The Graphics of the Rule Case A
Profit Maximization where MC = P
Case B Profit Maximization
where ATC>p>AVC
Case C Profit Maximization
where AVC>P
For lack of a better term, the standard case
Make a gracious exit from the
industry
Leave -- Now!
A Competitive Industry
The Graphics of the Rule Case A
Profit Maximization where MC = P
Case B Profit Maximization
where ATC>p>AVC
Case C Profit Maximization
where AVC>P
For lack of a better term, the standard case
Make a gracious exit from the
industry
Leave -- Now!
A Competitive Industry
The Graphics of the Rule Case A
Profit Maximization where MC = P
Case B Profit Maximization
where ATC>p>AVC
Case C Profit Maximization
where AVC>P
For lack of a better term, the standard case
Make a gracious exit from the
industry
Leave -- Now!
A Competitive Industry
The Graphics of the Rule Case A
Profit Maximization where MC = P
Case B Profit Maximization
where ATC>p>AVC
Case C Profit Maximization
where AVC>P
For lack of a better term, the standard case
Make a gracious exit from the
industry
Leave -- Now!
A Competitive Industry
A Competitive Industry
• Two cases:– When all firms have the same cost functions– When firms have different cost functions
A Competitive Industry
A Competitive Industry
• Two cases:– When all firms have the same cost functions– When firms have different cost functions
• We do the first case here; the second case in a later lecture.
A Competitive Industry
Identical Cost Functions
• In many cases, the assumption of identical production functions and hence identical cost functions make sense.
A Competitive Industry
Identical Cost Functions
• In many cases, the assumption of identical production functions and hence identical cost functions make sense.– Consider machine shop operators Smith and
Jones
A Competitive Industry
Identical Cost Functions
• In many cases, the assumption of identical production functions and hence identical cost functions make sense.– Consider machine shop operators Smith and
Jones– Wilson, Brown and Green can also enter with
the same production function.
A Competitive Industry
Identical Cost Functions
• In many cases, the assumption of identical production functions and hence identical cost functions make sense.– Consider machine shop operators Smith and
Jones– Wilson, Brown and Green can also enter with
the same production function.
After all, is there a difference between McDonald’s and
Burger King?
A Competitive Industry
The Graphical Analysis
ACMC
A Competitive Industry
The Graphical Analysis
ACMC
MC and AC curves for all firms, both
actual and potential
A Competitive Industry
The Graphical Analysis
ACMC
p1
q1
At p1, the firm supplies q1 units
A Competitive Industry
The Graphical Analysis
ACMC
p1
p2
q1q2
At p2, the firm supplies q2 units
A Competitive Industry
The Graphical Analysis
ACMC
p1
p2
pmin
q1q2qmin
At pmin, the firm supplies qmin units
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
With 10 firms, supply curve is 10 times each firm’s supply
curve
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
P = p2
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
P2 >AC
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
An Entry Signal!
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
S = 12 MC
p3
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
With 12 firms, supply curve shifts; price
drops.
S = 12 MC
p3
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
S = 12 MC
p3
Entry continues until price drops to pmin. Then no
incentives to enter or leave.
S = 20 MC
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
S = 12 MC
p3
LR Supply curve has = at
p=pmin
S = 20 MC
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
S = 12 MC
p3
No matter what the demand curve, firms
enter or leave until
p=pmin
S = 20 MC
A Competitive Industry
Industry EquilibriumS = 10 MC
p1
p2
pmin
10q110q210qmin
D
S = 20 MC
D’
Suppose the demand curve shifts to D’. 10 firms leave the industry
A Competitive Industry
The U-Shaped AC Curve
MC
AC
AVC
A Competitive Industry
The U-Shaped AC Curve
• Common sense suggests initially, AC is downward sloping.
MC
AC
AVC
A Competitive Industry
The U-Shaped AC Curve
• Common sense suggests initially, AC is downward sloping.
• If it never sloped upward, MC < AC. Always. No competitive firms.
MC
AC
AVC
A Competitive Industry
End
©2003 Charles W. Upton
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